Taxation and Other Laws (Amendment) Act, 2026: Key Changes, Tax Exemptions, and Business Impact

The Taxation and Other Laws (Amendment) Act, 2026 has been assented to by the President and published in the Gazette of India on 17 August 2026 as Act No. 21 of 2026. This act is an amendment of the Payment and Settlement Systems Act, 2007, the Income-tax Act, 2025, and the Finance Act, 2026. Moreover, this act will repeal the Income-tax (Amendment) Ordinance, 2026 without prejudicing any action taken under it.

The Act does not deal with a single tax change. It brings together several targeted measures. These include revised safe-harbour conditions for offshore investment funds managed from India, income-tax exemptions for specified foreign investors and foreign companies, longer support for electronics contract manufacturing, revised data-centre conditions, changes affecting business trusts and their special-purpose vehicles, and a new mechanism for identifying electronic payment modes on which charges cannot be imposed.

The changes are important for foreign companies, fund managers, institutional investors, business trusts, electronics manufacturers, diamond businesses, banks, and payment-system providers. They are also important for tax and finance teams because different provisions apply from different dates, and several benefits depend on conditions, documents, or procedures that are still to be prescribed.

Taxation and Other Laws (Amendment) Act, 2026 at a Glance

The critical issue to consider is the fact that the date appearing in the Gazette is not necessarily the effective date of all the changes. Each provision needs to be mapped individually before making any updates.

Legal Status and Effective Dates

This is an enacted law. The enactment process cannot be termed as proposals since the bill has not been called the Taxation and Other Laws (Amendment) Bill 2026. As per the gazette, this bill has been passed in Parliament, given assent by the President on 17th August 2026, and has been gazetted.

Section 1 gives a general rule stating that, unless another specific date is specified, the Act shall be deemed to come into effect on 1 April 2026. There are two categories of provisions that have different dates of effect.

The Act does not specify a filing date for all affected businesses. The 90-day rule to be discussed later applies only to eligible investment funds.

Regulatory and Legal Framework

The Act operates across three different legal areas.

Payment regulation

The Payment and Settlement Systems Act, 2007 regulates payment systems in India. Section 10A is titled “Bank, etc., not to impose charge for using electronic modes of payment.” Before this amendment, the provision referred to electronic modes prescribed under section 269SU of the Income-tax Act, 1961. The 2026 amendment replaces that reference with one or more electronic modes that the Central Government may specify by notification.

Income-tax framework

The Income-tax Act, 2025, is the main law affected by the amendment. The Act replaces Schedule I and changes Schedules IV and V.

• Schedule I deals with the conditions under which certain fund-management activities do not create a business connection in India for an eligible offshore investment fund.
• Schedule IV lists income that is not included in the total income of specified eligible persons, subject to stated conditions.
• Schedule V deals with income not included in the total income of certain eligible persons, including investment funds, business trusts, and their unit holders.

Finance Act rate framework

The Finance Act, 2026 contains the applicable rate framework for the relevant tax year. The amendment creates separate entries for a domestic company that is a special-purpose vehicle referred to in Schedule V and for other domestic companies within the stated categories.

Because these provisions interact, a business should not read one amended schedule in isolation. For example, the treatment of a business-trust unit holder under Schedule V and the rate applicable to its special-purpose vehicle under the Finance Act may need to be reviewed together.

Act-Wise Summary of Amendments

This map shows why the Act should not be presented as a single exemption scheme. Each change has its own taxpayer, income category, condition, and operational consequence.

Change to Electronic Payment Mode Requirements

Section 2 amends Section 10A of the Payment and Settlement Systems Act, 2007. Earlier, the condition of free was linked with the electronic means specified under section 269SU of the Income-tax Act, 1961. In the new provision, the reference is to one or more electronic payment methods as specified by the Central Government.

In simple terms, the legal authority to identify the covered payment modes now sits directly within the amended wording of the payment law. The underlying section remains a restriction on banks and system providers imposing charges on persons using the covered electronic modes.

What does this mean in practice?

• Notification issued by the Central Government regarding the electronic means subject to the amendment of the section should be monitored by banks and payment system service providers.
• Review of the payments contract, price list, and other correspondence with merchants may be required upon issuance of such notification.
• Merchants should not assume that every digital payment method automatically falls within the no-charge rule.
• The Act itself does not list the covered modes. It creates the notification mechanism.
• The amendment, by itself, does not create a new licensing requirement for merchants or payment users.
• This provision took effect on 17 August 2026, the date on which the Act was published in the Official Gazette.

Revised Safe-Harbour Conditions for Eligible Investment Funds

Schedule I of the Income-tax Act, 2025 is substituted by Section 3. The schedule provides for the provision of section 9(12), under which fund management activities that qualify for this provision, when done in India, shall not, by themselves, constitute a business connection in India of the eligible offshore investment fund.

The safest way to view this provision is as a conditional safe harbour. This means that all income of an offshore fund will not necessarily be exempt, but rather that the fund will not be deemed to have a business connection in India solely because the qualifying management activity was carried out by an eligible fund manager.

Conditions for the eligible investment fund

The fund must be established, incorporated, or registered outside India, collect money from its members, and invest that money for their benefit. It must also meet all applicable conditions below.

• Non-resident status: The fund must not be resident in India.
• Eligible jurisdiction: It must either be resident in a country or specified territory with which India has an agreement referred to in section 159(1) or section 159(2), or be established, incorporated, or registered in a country or territory notified by the Central Government.
• Indian-resident participation limit: Direct aggregate participation or investment by persons resident in India must not exceed 5% of the fund’s corpus on 1 April and 1 October of the tax year.
• Fund-manager contribution relief: While calculating the 5% limit, a contribution of up to Rs. 25 crore made by the eligible fund manager during the first three years of the fund’s operation is not counted.
• Four-month cure period: If the Indian-resident participation exceeds 5% on 1 April or 1 October, the condition is treated as satisfied if the participation is brought within the limit within four months of the relevant testing date.
• No Indian business management: The fund must not directly or indirectly carry on, control, or manage a business in India.
• No other business connection: No person acting for the fund may carry out an activity creating a business connection in India, except the activities undertaken by the eligible fund manager on the fund’s behalf.

Why the testing dates matter

This test is not referred to as a general year-end test. It shows the test dates of 1 April and 1 October. If a fund exceeds the threshold on either of those days, it should document this excess along with its reasons and correction date. The four-month cure provision is helpful but not an excuse for disregarding the threshold.

What “corpus” means

The corpus for this schedule is the amount of money the qualified investment fund has raised for investment as of a certain date. This is important because the 5% participation rule is computed based on this amount..

Conditions Applicable to Eligible Fund Managers

The safe harbour also depends on the person managing the fund. An eligible fund manager must be engaged in fund-management activity and satisfy four conditions.

• Independence: The manager must not be an employee of the eligible investment fund or a connected person of the fund.
• Regulatory registration: The manager must be registered as a fund manager or investment adviser under the specified regulations.
• Ordinary business activity: The manager must act in the ordinary course of its fund-management business.
• Profit-entitlement ceiling: The manager and its connected persons must not be entitled, directly or indirectly, to more than 20% of the profits arising to the eligible fund from transactions carried out through that manager.

The specified regulations are:

• Securities and Exchange Board of India (Investment Advisers) Regulations, 2013,
• Securities and Exchange Board of India (Portfolio Managers) Regulations, 2020, or
• Other regulations made under the Securities and Exchange Board of India Act, 1992 and notified for this purpose.

The definition of “connected person” is linked to section 184(5) of the Income-tax Act, 2025. Funds and managers should therefore examine employment relationships, ownership, control, profit-sharing, and connected-person arrangements together rather than checking the manager’s registration alone.

Reporting Obligations and the 90-Day Timeline

Every eligible investment fund must furnish information about its activities for each tax year within 90 days after the end of that tax year.

The fund must:

• submit a statement in the prescribed form to the prescribed income-tax authority containing information about fulfilment of the Schedule I conditions, and
• provide other relevant information or documents that may be prescribed.

The schedule also states that its provisions will apply in accordance with the guidelines and in the manner prescribed by the Board.

As a practical control, a fund should not wait until the filing window opens to collect evidence. It should maintain residency documents, participation calculations, capital-account records, manager-registration evidence, profit-entitlement calculations, and records of activities performed in India throughout the year.

New and Extended Income-Tax Exemptions

Section 4 makes several changes to Schedule IV. These provisions exclude specified income from total income only when the eligible person and every stated condition are satisfied.

Government-security exemption for FIIs

New serial number 13D covers a Foreign Institutional Investor. It excludes:

• Interest on a government security, and
• Capital gains arising from the sale, exchange, or transfer of a government security.
• The exemption is conditional on furnishing information in the form and manner to be prescribed.

For this provision, “Foreign Institutional Investor” has the meaning assigned in section 210(6)(a) of the Income-tax Act, 2025. “Government security” is defined in section 2(f) of the Government Securities Act, 2006.

The entry should not automatically apply to every foreign portfolio investor, debt instrument, or public-sector security. The taxpayer and instrument must fit the statutory definitions.

Government-security exemption for the Bank for International Settlements

Serial number 13E provides the Bank for International Settlements with the same categories of exempt income: interest on government securities and capital gains from the sale, exchange, or transfer of such securities.

Schedule IV defines the institution as the Bank for International Settlements, established at the Hague Conference in 1930 and headquartered in Basel, Switzerland. This is an institution-specific exemption, not a general exemption for all foreign banks or international bodies.

Repeal of the Ordinance and continuity of action

The Income-tax (Amendment) Ordinance, 2026, had introduced the government-security provisions before the Act was passed. Section 7 repeals that Ordinance.

The saving clause is important. It states that anything done or any action taken under the Ordinance will be treated as having been done under the corresponding provisions of the Act. This avoids a legal gap merely because an Act of Parliament has replaced the temporary Ordinance.

Rough-Diamond Income Exemption and Its Conditions

New serial number 13F applies from 1 October 2026. It covers income from the sale of rough diamonds earned by a foreign company falling within one of the stated categories:

• A foreign company engaged in diamond mining,
• a shareholder of such a diamond-mining company, or 
• a broker, aggregator, tender entity, or auction entity connected with the sale of rough diamonds.
• The exemption is subject to three conditions.

The rough-diamond sale must take place in a notified special zone referred to in section 9(9)(c)(ii)(C).

The foreign company must maintain and furnish information in the prescribed form and manner.

The exemption is available only up to the tax year ending on 31 March 2041.

Meaning of rough diamond

The Act defines a rough diamond as a diamond that is unworked or only sawn, cleaved, or bruted, falls under Tariff Heading 7102 10, 7102 21, or 7102 31 of the First Schedule to the Customs Tariff Act, 1975, and is accompanied by a Kimberley Process Certificate.

All aspects of the definition are important. It would be erroneous to consider a product as falling under the definition solely due to the fact that it is commercially labelled as a rough diamond.

Practical implications for diamond businesses

Qualifying foreign companies can receive a more defined tax system structure for their eligible sales within the notified special zone. Nonetheless, such eligibility is not guaranteed automatically. The transaction papers need to indicate the category in which the seller qualifies, the place of the notified special zone, tariff classification, and the respective Kimberley Process Certificate.

Electronics Contract Manufacturing and Customs-Bonded Warehousing

The Act contains two important electronics-related changes: an extension and revision of an existing entry and a new exemption for a component-warehousing arrangement.

Extension of the existing contract-manufacturing relief

The condition in relation to the contract manufacturer is replaced by the Act in serial number 13A. The amended condition requires the contract manufacturer to manufacture specific electrical items for the foreign firm as consideration.

The Act also replaces the year 2030-31 with 2040-41. This extends the stated availability of the relevant exemption by ten tax years.

Foreign companies and Indian contract manufacturers should review their agreements to confirm that the arrangement clearly records:

• production of specified electronic goods,
• production on behalf of the foreign company, and
• consideration payable for the manufacturing activity.

The Act does not prescribe a standard contract format.

New exemption for customs-bonded component warehousing

Serial number 13G applies from 1 October 2026. It concerns income accruing or arising from storing components in a warehouse in a customs-bonded area.

The eligible person is a foreign company that stores components in a warehouse so they can be provided to a contract manufacturer for the manufacture of specified electronic goods.

The entry states the following conditions:

• The exemption is available on the sale of components by the foreign company,
• The contract manufacturer must produce electronic goods on behalf of a foreign company,
• Information must be furnished in the prescribed form and manner, and
• The exemption is available up to the tax year ending 31 March 2041.

For this purpose:

• “contract manufacturer” means an Indian company that produces specified electronic goods on behalf of a foreign company in a customs-bonded area, and
• “customs bonded area” means a warehouse referred to in section 65 of the Customs Act, 1962.

The heading of the income entry refers to income arising from storage, while one of its conditions refers to exemption on the sale of components. Businesses should therefore map the precise income stream and contractual arrangement carefully rather than applying the entry broadly to every warehousing receipt or component sale.

Products Covered as Specified Electronic Goods

The Act inserts Note 2A for serial number 13A. It defines specified electronic goods as:

• mobile phones,
• laptops, all-in-one personal computers, and tablets,
• servers and ultra-small form factor devices,
• sub-assemblies of the finished goods listed above, and
• hearables, wearables, and accessories related to the finished goods listed above.

This definition is also used for the new customs-bonded warehousing entry through Note 6.

Businesses should create a product-level eligibility file rather than relying only on broad commercial descriptions such as “electronics” or “components.” The file should show the relevant product, its relationship to the listed finished goods, the manufacturing arrangement, and, where applicable, the customs-bonded location.

Revised Conditions for Specified Data Centres

The Act makes two changes connected with serial number 13C.

First, it omits clause (a) in column D of that entry. The exact consequence should be read together with the pre-amendment entry and the remaining conditions.

Second, it replaces the definition of “specified data centre.” Under the new definition, a specified data centre must:

• be operated by an Indian company, whether the company owns or leases it, and
• satisfy other conditions that may be prescribed.

The express recognition of leased operation is important. Ownership of the facility is no longer the only model stated in the definition. However, leasing alone is not enough because other prescribed conditions may still apply.

Foreign enterprises utilizing this section must verify the identity of the Indian operator, the lease/ownership documents, the service agreement, and other terms and conditions laid out in the Act itself.

Business Trusts, Unit Holders and Special-Purpose Vehicles

The Act makes connected changes to Schedule V of the Income-tax Act, 2025, and Section 3 of the Finance Act, 2026.

Change for business-trust unit holders

Schedule V, serial number 5, deals with distributed income referred to in section 223 received by a unit holder of a business trust. Before the amendment, the conditions listed income proportions for which the exemption would not be allowed. Clause (b) covered dividend income received or receivable by the business trust from an SPV where that SPV had exercised the option under section 200.

Section 5 of the 2026 Act does not include clause (b). In reality, the limitation on dividends is no longer part of the proportions that are excluded from the unit-holder exception. The limitation on interest mentioned in clause (a) and the limitation on real estate rental mentioned in clause (c) continue to apply.

Separate rate entry for an SPV

Section 6 amends the rate tables contained in Section 3 of the Finance Act, 2026. In respect of domestic companies falling under sections 200 and 201, the substituted entries are as follows:

• 10% for each domestic company, except SPV mentioned in Schedule V, Note 2, and
• 25% for a domestic company that is such an SPV.

Within the Finance Act framework, these entries operate as the relevant surcharge-rate entries. A business trust’s SPV should therefore not assume that the standard 10% entry continues to apply merely because it is a domestic company under section 200 or 201.

Meaning of SPV

Schedule V, Note 2 defines the special-purpose vehicle for the relevant business-trust provision as an Indian company in which the business trust holds a controlling interest and the required percentage of shareholding or interest under the law governing the trust’s registration.

The two amendments should be modelled together. The change may improve the treatment of qualifying dividend income at the unit-holder level while changing the surcharge rate applicable to the qualifying domestic-company SPV. The final result depends on the entity structure, tax regime, income flow, and applicable tax-year facts.

Matters Awaiting Rules, Forms, Guidelines, or Notifications

Several parts of the Act cannot be implemented fully from the statutory wording alone.

An expression such as “as may be prescribed” is not a minor drafting detail. It means the Act creates the framework but leaves part of the operating process to later rules, forms, guidelines, or notifications.

Stakeholder-Wise Business Impact

Impact on offshore funds and managers

Although the list of conditions has been consolidated into a more succinct statutory format, it still requires continuous monitoring. The 5% participation criterion for Indian residents, the cure provision, the 20% manager profits restriction, and no other Indian businesses require information from the tax, legal, investment relations, and operations departments.

Impact on electronics and diamond businesses

The newly introduced clauses may be advantageous for cross-border transactions if they satisfy some requirements, but they are paperwork-based. The availability of such relief will depend on the categorization of the products, contractual arrangement, details about the customs bonded zone, and prescribed reporting.

Impact on business trusts

The unit-holder and SPV amendments pull in different directions and should be analysed together. A simplified statement that the amendment only “reduces tax” or only “increases tax” would be misleading. The result depends on where income arises, how it moves through the structure, and which entity bears the relevant tax or surcharge.

Risks and Practical Challenges

The Act does not include any penalties in its seven sections. It is recommended that the business avoid making false promises regarding the possibility of fines or even prosecution. More direct problems include ineligibility, insufficient evidence, or using benefits too soon.

• Wrong Effective Date: Applying a 1 October exemption from 1 April could produce an incorrect tax position.
• Overbroad Eligibility: Treating every foreign investor, diamond trader, electronics component, or data centre as covered could lead to an unsupported claim.
• Missing Prescribed Filings: The exemption would be lost if the prescribed filing is not made after the procedures have been communicated.
• Weak Connected-Person Analysis: An offshore fund may satisfy the visible participation limit but still face issues under fund-manager independence or profit-entitlement conditions.
• Insufficient Product Classification: Commercial product names may not establish eligibility under the statutory list or customs tariff headings.
• Mismatch Between Contract and Reality: The agreement for manufacturing/warehousing could not establish whether the production was being done for the foreign entity in consideration.
• Lack of Integration of Taxation Tiers: Business trusts should not analyse unit-holder exemption and SPV surcharge in isolation.
• Communication Gap: The payment providers cannot re-engineer the charges to align with the expectations of the mode of electronic use by the government.

What Businesses Should Do Next

Recommended internal evidence file

Depending on the provisions concerned, firms need to retain:

• The Gazette and legal note in respect of the provisions,
• Residency and status documentation,
• Investor participation and corpus computation,
• Connected person and entitlement of profits calculation,
• SEBI registration proof,
• Government-issued identity and income proof,
• Notified zone and bonded customs warehouse documentation.
• Customs tariff classification records,
• Kimberley Process Certificates,
• manufacturing, storage, sale, and service contracts,
• product lists and bills of material,
• business-trust, unit-holder and SPV structure charts, and
• Copies of every prescribed statement, information filing, and acknowledgement.

This list includes recommended internal controls. The Act itself does not expressly prescribe every document listed above.

How Corpseed Can Help

The Taxation and Other Laws (Amendment) Act, 2026 provides different requirements for investment funds, foreign companies, manufacturers, and business trusts. Corpseed can assist the impacted business entities in understanding the requirements and preparing a compliance action plan accordingly.

Applicability and Compliance Assessment

Corpseed can help businesses:

• Identifying the provisions that apply to their operations.
• Determining the relevant dates and conditions.
• Preparation of a compliance checklist for each provision.
• Identifying forms, filings, and record-keeping.

Investment Fund and Fund Manager Review

Support for eligible investment funds may include:

• Reviewing the 5% Indian-resident participation limit.
• Checking fund manager eligibility and registration.
• Reviewing connected-person and profit-sharing conditions.
• Preparing for the 90-day reporting requirement.

Foreign-Company Tax Exemptions

Corpseed can assist with evaluating exemptions relating to:

• Government securities.
• Rough-diamond transactions.
• Electronics contract manufacturing.
• Customs-bonded component warehousing.
• Specified data-centre arrangements.

Business Trust and SPV Support

Corpseed can help business trusts and special-purpose vehicles review:

• Unit-holder income treatment.
• Dividend-related changes.
• Applicable SPV surcharge rates.
• Tax records and supporting documents.

Regulatory Monitoring

Corpseed can monitor new forms, rules, guidelines, and government notifications issued under the Act and help businesses update their compliance processes accordingly.

Businesses seeking an applicability review, documentation support, or a provision-specific action plan may contact Corpseed for corporate tax compliance services. The availability of any exemption or tax benefit will depend on the applicable law and the facts of each case.

Key Takeaways

The Taxation and Other Laws Amendment Act 2026 is an Act of Parliament that amends three key Acts of Parliament. This amendment pertains to offshore funds, foreign investment, electronics and diamond industries, data centre arrangements, business trusts, special purpose vehicles, and payment system participants.

• The general commencement date is 1 April 2026, but the payment-law change applies from 17 August 2026, and the new rough-diamond and electronics-warehousing exemptions apply from 1 October 2026.
• Eligible offshore funds must meet the 5% Indian-resident participation test on 1 April and 1 October, with a four-month cure period for an excess on a testing date.
• Eligible funds must furnish the prescribed statement within 90 days after the end of the tax year.
• FIIs and the Bank for International Settlements receive conditional exemptions for specified government-security income.
• The rough-diamond and bonded-electronics exemptions run up to the tax year ending 31 March 2041, subject to detailed eligibility and reporting conditions.
• Existing electronics contract-manufacturing relief is extended from 2030-31 to 2040-41.
• Business trusts should analyse the unit-holder exemption change and the separate 25% SPV surcharge-rate entry together.
• Several forms, conditions, guidelines and notifications remain to be issued, so ongoing monitoring is essential.